We Should Celebrate Price Deflation
By Doug French
There is now world-wide worrying about price
deflation again. After all, real estate prices have sunk, stock prices have hit
the ditch, the price of oil has the sheiks concerned, and even Las Vegas hotel room rates have plunged.
Sounds like all good news for those of us who buy things, at the same time being
a bit of a bummer for heavily indebted sellers.
But Ex-Federal Reserve
governor Rick Mishkin told an early morning CNBC audience that "inflation
could be too low." On the same program, James K. Galbraith, who teaches
economics at the Lyndon Baines Johnson
School at the University
of Texas at Austin, chimed in that there has been "a
huge deflationary shock" to the economy, and of course the government
needs to step in and stabilize the markets and bail out businesses.
"The Fed did not
allow the money base to expand, and we had a panic in the liquid markets,"
supply-side guru Arthur Laffer told a Las
Vegas audience last week, "which caused this
financial panic, pure and simple."
Across the pond, Ambrose
Evans-Pritchard, writing for the Telegraph, warns "Abandon all hope once
you enter deflation." Fine wines and white truffles have dropped in price
and these price drops could "spread through the broader economy, lodging
like a virus in the British and global monetary systems."
"The curse of
deflation is that it increases the burden of debts," frets
Evans-Pritchard, who goes on to contend: "Deflation has other insidious
traits. It causes shoppers to hold back. They wait for lower prices. Once this
psychology gains a grip, it can gradually set off a self-feeding spiral that is
hard to stop."
Yes, the current
economics brain trust is worried that consumers will collectively show the good
sense to delay purchases, pay down debt and increase their savings. After all,
this liquidation of malinvestments will likely take awhile. The prudent thing
to do in times of uncertainty is not to ramp up debt and spend money you don’t
But now all of a sudden
saving is a dirty word. According to Evans-Pritchard, "It [savings] also
redistributes wealth – the wrong way. Savings appreciate, which is nice for the
‘rentiers’ with capital. The effect is a large transfer of income from working
people with mortgages to bondholders."
course sounder thinking economists don’t see deflation as evil, as Jörg Guido
Hülsmann points out in his just published Deflation
& Liberty, "it fulfills the very important social function of
cleansing the economy and the body politic from all sorts of parasites that
have thrived on the previous inflation."
And although Hülsmann’s
definition of deflation is the proper one: a reduction in the quantity of base
money, while what the main-stream blathers on about is a drop in prices, the
point remains: "There is absolutely no reason to be concerned about the
economic effects of deflation – unless one equates the welfare of the nation
with the welfare of its false elites," explains Hülsmann.
But to say governments
and their friends are concerned about deflation is an understatement. Professor
Peter Spencer from York
University says the Bank
of England has learned many hard lessons since its founding in 1694. And with
no gold standard to get in the way, that central bank is "cutting rates
very fast, and if necessary they too will to turn to the helicopters,"
referring to Milton Friedman’s (or Ben Bernanke’s) idea that governments are
capable of dropping bundles of banknotes from helicopters to stop deflation.
This printing of money
"will keep the [deflation] wolf from the door," according to
Professor Spencer. But creating more money doesn’t create more goods and
services. There is no wolf at society’s door. "From the standpoint of the
commonly shared interests of all members of society, the quantity of money is
irrelevant," Hülsmann makes clear. And if the over indebted and the over
lent go bankrupt, that’s fine. The fact is, these liquidations have no effect
on the real wealth of a nation, and as Hülsmann stresses, "they do not
prevent the successful continuation of production."
Meanwhile the Bernanke
Fed has gone on an unprecedented growth spurt, more than doubling its balance
sheet – out of thin air – in an attempt to bail out the financial community.
Formerly the asset side of the American central bank’s balance sheet was
Treasury securities with a dash of gold. Now the Fed, despite being double the
size, has fewer Treasury securities, with the rest being the toxic securities
that has buckled the big Wall Street banks. It’s as if Bernanke is channeling
John Law, the architect of France’s
Mississippi Bubble back in 1720. Law couldn’t keep his bubble inflated and
neither will Bernanke and his fellow central bankers.
While central bankers furiously
try to re-inflate, cheered on by the mainstream financial media, monetary
authorities should deflate the money supply, pulling in their horns like
consumers are doing. Deflation is a "great liberating force," writes
Hülsmann, "because it destroys the economic basis of the social engineers,
spin doctors, and brain washers."
Doug French is executive
vice president of the Ludwig von Mises Institute
and associate editor for Liberty Watch
Magazine. This article appeared on Lew Rockwell’s site.
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